Recent Transaction - BreitBurn Energy Partners, L.P.

On Friday, the outstanding June $15 calls I had sold against my BreitBurn Energy Partners, L.P. (BBEP) units were exercised and the units called away. My profit on the position was $9,837.27, and the IRR for the position was 104% (beginning roughly a year and a half ago). The below chart shows the transaction history for the BBEP position.

BBEP is an oil and gas limited partnership that operates various oil and natural gas producing properties in the US. I began purchasing BBEP units in December of '08, and through April of '09 after the financial market crash. Oil and natural gas prices had plummeted due to concerns about the global economy, and many oil and gas companies faced liquidity crises. While BBEP's oil and gas production was substantially hedged at far higher prices than prevailing spot prices, BBEP's management announced a suspension of the company's distribution. In addition, the company was involved in a major lawsuit with its largest shareholder, Quicksilver Resources Inc., over control of the company (which has since been resolved), further compounding the market's pessimistic outlook. As a result, I was able to purchase BBEP units below fair value at a very low multiple of normalized cash flows.

As the credit markets stabilized and oil and gas prices began to recover, BBEP's unit price began to rise to a more rational level. In January of this year, when BBEP's unit price was in the mid $13s (a price I believed reflected a much more rational view of the company's future cash flow generation), I sold the June $15 calls against my units because of the substantial premium offered. My effective sale price, taking into account the call premium, was $15.90 before commissions. While the units certainly have some remaining upside and offer an attractive distribution yield at today's price (roughly 10%), I'm happy to look elsewhere for opportunities at this point.

Noble Corporation

On 6/11 I opened a position in Noble Corporation (ticker: NE) by purchasing 200 shares for $5,458. I will look to purchase additional shares on further price weakness.

Noble is an offshore contract oil well driller, and its stock price has been hit tremendously hard in recent weeks as a result of the BP Deepwater Horizon incident. While Noble has no involvement with the Gulf disaster, the market is generally concerned with the effect that an extended moratorium on offshore drilling and new costly regulations could do to Noble's long term prospects. Additional concerns surround the company's ability to complete drilling projects currently under contract. I believe these concerns are overblown and at current prices, Noble represents a compelling bargain (slightly less of a bargain after its 10%+ gains since I purchased the stock).

Noble is an international operation with around 62 drilling platforms or rigs. Just over 20% of the company's revenues come from US based operations, and the remaining is spread throughout the world. Maintaining this level of jurisdictional diversity should be a big help if the Obama administration prolongs the current moratorium on drilling. Also helpful is the company's conservative capitalization - it maintains roughly the same amount of debt as cash on its balance sheet. By way of comparison, Transocean, another offshore driller, operates with a substantial amount of debt (roughly $9B to $13B of tangible assets).

Noble currently trades at around 5x last year's earnings and 3.2x EV/EBITDA. Notwithstanding the company's current challenges, this extremely low valuation allows for a sufficient margin of safety. In addition to a compelling valuation, Noble is a high ROA and ROE business, especially over the last ten years as the global economy has boomed and energy prices have risen (a trend I believe is likely to continue). Given the pace of our energy consumption, I'm also skeptical of claims that global oil consumption will decrease or be replaced. Offshore drilling may not be a choice given global energy needs.

Bottom line - I believe the Deepwater Horizon disaster has created an opportunity to purchase an excellent company at a compelling valuation.